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Sunday, March 26, 2023

2023-03-26

*** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:


If you have been watching the “inside of the stock market” over the past six months or so, you’ve been able to see the increasingly popular “soft landing” narrative regarding the direction of the economy play out in prices. Specifically, I’m referring to the the relative performance of things like transportation stocks, materials, retail and small caps. .....



Price gouging! That’s the culprit for high inflation. I like it as a thesis. I really do. It partly exonerates fiscal policy (although it’s a lot harder to gouge people who don’t have any money, so in that respect, you could argue that government transfer payments made people more “gougable”), and places the blame almost solely with “corporate greed” which, as a concept, nobody likes. In a Thursday note, SocGen’s Albert Edwards cited a hodgepodge of media coverage in suggesting that “wages are not the problem” when it comes to inflation, profit margins are. Certainly, negative real wage growth makes a decent case ......


Bailouts are back, but will the public bear them after a decade of inequality?


............ But why will we need more bailouts in the first place? Is it not done and dusted with Silicon Valley Bank, Signature and Credit Suisse all sorted out? Unfortunately, we likely just saw the first of several bailout waves. Why? A hard landing is firmly on the way for the US economy, and that will cause more pain for the financial sector ........



But the Fed may try again anyway

.......... Similar to the tardiness they displayed in responding to the inflation cycle upturn that began in autumn 2020, will they similarly ‘screw up’ the business cycle downturn and march forward despite a severe synchronized global recession currently unfolding?



Collapsing velocity will lead to financial conditions continuing to tighten even as the Fed rapidly expands its balance sheet.

When banks are in trouble, it has a geared impact on the rest of the economy. In 2008, money velocity (essentially, how many times each dollar changes hands in a given period) collapsed as banks stopped lending; central banks responded by cutting rates to zero and massively expanding their balance sheets.

To no avail, however, and velocity kept falling until 2020 when it started to rise again – it’s no coincidence we now have an inflation problem. The remedy has created a new nightmare for policymakers as banks around the world are reeling from the fastest rate-hiking cycles seen for several decades.

Central banks are now back in the game of trying to arrest the fall in velocity – deteriorating their balance sheets - to avert the deep recession that would result. The signs are so far it is not working. ....


The Minsky Moment and Theory of Reflexivity: What Minsky and Soros Taught Us About Instability

I’ve long believed that markets and economies trend towards disequilibrium (aka a loss of stability). And this is contrary to what we learned in economics – that a system tends towards equilibrium. And while equilibrium may sound good in theory; it doesn’t hold up in reality. Why? ....

Now, while many may cling to the idea of equilibrium and ‘rational’ markets, there were a few who disagreed with this train of thought and have made compelling findings to the contrary. But none more so than these two:
Hyman Minsky and his Financial Instability Hypothesis (aka the ‘Minsky Moment’).
And George Soros with his Theory of Reflexivity (aka reflexive financial systems).
Let me explain why they’re so important. . .



The market’s in a highly unstable state right now. These violent swings show the inadequacy of the standard models that the Fed and other mainstream analysts use. The Fed assumes so many things about markets that are simply false, like that markets are always efficient, for example. They’re not. Under volatile conditions like these they gap up and down — they don’t move in rational, predictable increments like the “efficient-market hypothesis” supposes. The problem is that the Fed’s models are empirically false.











Banking Fare:


Janet Yellen is once again on thin ice inside the Biden Administration over her bungling of the banking crisis that keeps roiling markets, The Post has learned. The question is when will Sleepy Joe & Co. finally act? They need to put Yellen out of her misery and end ours by handing her job to someone who knows how to deal with the very real possibility of banks failing on a scale not seen since the 2008 financial crisis and a possible deep recession. ......



Financial crashes like revolutions are impossible until they are inevitable. They typically proceed in stages. Since central banks began to increase interest rates in response to rising inflation, financial markets have been under pressure. ....

........ There is a concerted effort by financial officials and their acolytes to reassure the population and mainly themselves of the safety of the financial system. Protestations of a sound banking system and the absence of contagion is an oxymoron. If the authorities are correct then why evoke the ‘systemic risk exemption’ to guarantee all depositors of failed banks? If there is liquidity to meet withdrawals then why the logorrhoea about the sufficiency of funds? If everything is fine, then why have US banks borrowed $153 billion at a punitive 4.75% against collateral at the discount window, a larger amount than in 2008/9? Why the compelling need for authorities to provide over $1 trillion in money or force bank mergers? ........






How a 166-Year Old Financial Giant Fell Apart, and What the Fallout Could Mean for the Global Financial System



Quotes of the Week:

Yellen: As I said last week, the U.S. banking system is sound. The federal government’s recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors’ savings remain safe.
then Yellen again: As I have said, we have used important tools to act quickly to prevent contagion. And they are tools we could use again. The strong actions we have taken ensure that Americans’ deposits are safe. Certainly, we would be prepared to take additional actions if warranted.



Charts:
1: 
2: 



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(not just) for the ESG crowd:

Federal scientists are using recon flights and field research to track down metals that are key to the energy transition.






Other Fare:



We’re finally starting to see the truth about the vexing condition. It’s not what we thought.




Fun Tweet of the Week:



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